Why this generation won’t be as wealthy as the last one

After nearly 70 years, America’s middle class is no longer growing

This post-war family in 1950s America had reason to be optimistic.

America’s middle class is getting left behind.

Most U.S. middle-income households (81%) say they had flat or falling income between 2004 and 2014, according to U.S. Congressional Budget Office data analyzed by the McKinsey Global Institute, a global management company, and released earlier this month. And 61% of middle-income households say their incomes are either not advancing or staying the same as they were last year, according to a survey of 2,000 adults published that was part of the same study. “Most people growing up in advanced economies since World War II have been able to assume they will be better off than their parents,” the report states. “Yet this overwhelmingly positive income trend has ended.”

The rich appear to be leaving the middle class behind. The American middle class made up just 26% of incomes in 2014, down from 46% in 1979, adjusted for inflation, a separate report released last month by the Urban Institute found. The upper middle class controlled 63% of all income in 2014, up from just 30% in 1979. The study analyzed the U.S. Census Bureau’s Current Population Survey. It’s not because more middle-class Americans have become richer: Middle-income households make up 120.8 million of the population, almost as much as upper middle-class and lower-income Americans combined, according to the nonprofit Pew Research Center in Washington, D.C.

“People with higher incomes had faster growth than those with lower incomes,” says Stephen Rose, an affiliated scholar at the Urban Institute. He defines middle class as earning between $50,000 and $99,000 for a family of three and upper middle class as earning between $100,000 and $349,999 a year for a family of three. Those earning more than that are classified as “rich.” Social class knits together income, wealth, education, prestige and cultural sophistication, so there is no one definition of middle class. “The rich aren’t middle class because they have resources that permit them to have the best of many things,” he says. “The poor and near-poor have very limited options.”

The middle classes are often mentioned during an election year. The Democratic presidential candidate Hillary Clinton and Republican candidate Donald Trump have both addressed middle-class voters on the campaign trail. But who exactly qualifies as middle class? “Many people talk about the conditions of the middle class but few define it, and the term upper middle class is equally ambiguous,” Rose says. “Because people tend to live in communities with people who have similar incomes, they view themselves as being near the middle because their neighbors’ circumstances are similar to their own even if their incomes are significantly below or above the U.S. median.”

And the middle class is not just suffering in the U.S. Before the Great Recession, gross domestic product growth contributed about 18 percentage points to median household income growth in the U.S. and Europe. In the seven years after the recession, that contribution fell to four percentage points, according to the lead authors of the report, Richard Dobbs, a McKinsey senior partner in London, and Anu Madgavkar, a McKinsey partner based in Mumbai, India. (In the U.S. middle-income households are typically defined as those with an income that is two-thirds to double that of the median household income, after incomes have been adjusted for household size.)

Why the reversal of fortune for middle classes? The recession and slow recovery after the 2008 global financial crisis have hurt middle-income families, but other factors played a role, McKinsey’s authors wrote. They include demographic trends such as retiring baby boomers earning less and shrinking household sizes, millennials early in the careers being cheaper to hire, increased automation in business and outsourcing jobs overseas. The authors argue that some Americans see a simpler explanation: “The economic and social impact is potentially corrosive.” Nearly one-third of middle-income households expressed negative opinions about both free trade and immigration.

For rich Americans, meanwhile, it’s a long way down. “As the income gap has widened at the top, the consequences of falling out of the upper middle class have worsened,” they add. “So the incentives of the upper middle class to keep themselves, and their children, up at the top have strengthened.” Indeed, inequality between the wealthiest and poorest American neighborhoods grew most substantially between 1990 and 2010 in the largest urban commuting zones where people work and live, according to a report released last year by the Urban Institute, a Washington, D.C. nonprofit organization that focuses on social and economic policy.

Members of the upper middle class have more to lose than their counterparts in the U.K., Canada and Japan, according to data from the Paris-based Organization for Economic Cooperation and Development analyzed this month by the Brookings Institution, a nonprofit public policy organization based in Washington, D.C. “There is a significant earnings gap between those at the top and those in the middle,” a report co-authored by Richard Reeves and Nathan Joo, two economists at Brookings Institution. Given the disparity between the classes in the U.S., the rich have further to fall. “This gap is much bigger in the U.S. than in other nations, and is getting bigger over time.”